How To Buy The Insurance You Really Need

Everyone knows now why people, especially women need insurance. But, how to buy insurance is still a topic unfamiliar to many.

Well, what really triggered that argument was whether buying insurance is adequate investment or not. What started off as ‘how much insurance does one need’ ended with ‘it is a good way of accumulating wealth and part of a good retirement portfolio!’ True, to some extent, and for people with a certain personal profile.

My friend, Manish Jain, a certified financial planner, also feels the same way. He says insurance and investment are two separate things and are ideally kept separate as both fulfill a different requirement and should be used accordingly. Most people who try and bundle both with the idea of quickly doubling their money are left with neither insurance nor returns.

…Insurance is primarily a hedge against a future unforeseen risk and making that a surrogate for investment is likely to leave you with minimum returns.

To make things simple, let’s just define insurance. The text book definition goes something like this: Insurance is a tool whereby an individual substitutes a small cost (the premium) for a large uncertain financial loss (which is the risk).

All women need life insurance – whether you are a single or married woman, working or home maker. What varies is the amount of protection you need to take.

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Buying Insurance: How much?

This brings us to the question – how much insurance do you need to take? Well, this depends on your family profile, risk factors, number of dependants, your asset accumulation and allocation strategy and much more. The insurance protection for a single 23-year-old woman is different from what a 33-year-old working married woman with one child needs. In the latter’s case, there is a dependant and she shares the family responsibility with her spouse.

Here is a simple thumb rule that will help you decide on the amount of insurance coverage you could do with. If you strictly go by how much you earn, and are under 35 years, approximately 12 times of your annual net income can be your insurance requirement. That is, if you are 30 years old with a net annual income of Rs. 3 lakhs, then your insurance requirement is around Rs 36 lakhs. If you are between 35 and 50 years, then it is 10 times the net annual income. (Disclaimer: This is very rough estimate and thumb rules neither consider the uniqueness of each case nor the financial needs of each family.)

Here is a simple thumb rule that will help you decide on the amount of insurance coverage you could do with. If you strictly go by how much you earn, and are under 35 years, approximately 12 times of your annual net income can be your insurance requirement.

How to compare Insurance policies

If you were to cover your total insurance need by taking a traditional plan or through Unit Linked Insurance Plans (ULIPs), chances are it will knock out a good portion of your investible surplus, after deducting the monthly expenses.

Term insurance cover could be your solution. Jain suggests taking a pure term plan. This will help you maximize the insurance cover at a minimum price.

The premium value is less in a term plan when compared to the other insurance plans as there is no cash value generated. It’s pure insurance and the premium only buys protection in the event of a risk and nothing else.  You could go for term plan initially and look at other insurance products later, based on your personal profile, individual goals and requirements.

Benefits of buying Insurance

Insurance brings along tax benefits that that you can avail under Section 80 C (up to Rs.1 lakh of premium paid in a year). But do not buy insurance just to complete the financial year end formality. Jain feels, “Sadly, the focus is on completing the 80C limit and not on the utility of the product that one is buying. Hence, in most cases one ends up purchasing a lemon.” 

The biggest advantage that you accrue when you take a life insurance policy is the compulsion that it brings along with it.  Most of us do not have the discipline to follow a regular investment plan. But paying your premiums, monthly, half yearly or annually, brings in the discipline of contributing towards a future uncertainty.

Perhaps, for my lawyer friend, buying insurance also doubles up as an investment. But, for my entrepreneur friend, who is more open to taking risks, locking funds for a real low return (6 to 10 per cent) like in this case, is not a really exciting investment opportunity, especially considering the number of products and information available! So looking at insurance as a part of your overall financial goal will help you understand where to invest, and how much insurance to buy. Invest well, Insure smart.

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